Foreclosure homes are not the bargain they appear to be. If you are looking at Foreclosure Radar, Realty Trac or the like, these are sights designed to gather information to sell you a service or sell your information for a gain. Please keep that in mind.
There are Short Sales, Bank Owned, and Foreclosures. A real foreclosure is when the owner has defaulted on their debt and THAT debt is foreclosing. It doesn’t necessarily remove any superior liens over the subordinate lien. What that means if you go to the court house with your required cashier’s check you could be purchasing the foreclosed debt, along with the first, property taxes, contractor liens or any other combination of problems.
So I highly caution all buyers that that route is only designed for those with a lot of knowledge, resources, and are ok with the potential risk to liability, financially solid investors.
RENT TO OWN:
This is rare in a seller’s market and in a high demand rental market. Where rent to own comes into play is when a seller can not or decides not to sell at this current time and wants to get a tenant that will likely pay above market rate for rent and put up money to lock in an agreed to sale price option.
This is how that works. The Seller and Buyer will agree to an option, say in one year the Buyer has an option of turning the lease into a purchase contract. The purchase contract terms are agreed to now. The price, etc. In the contract the Buyer agrees to pay an option, usually this option can be equivalent earnest money and often is higher than a security deposit. Example $5,000. This option money will be applied to any down payment when the option is exercised. In addition the buyer and seller (landlord/tenant) agree that a portion of the rent will be applied to the future purchase price. Example, rent is $1200 but tenant will pay $1500 with $300 going towards the future purchase price. In one year if the Buyer/Tenant decides to exercise their option to purchase than the option money, in this example $5000 plus the option rent $300 x 12 = $3,600 then $8,600 would be considered down payment on the purchase. In the event the Buyer does not exercise their option the $3,600 is not returned, and what ever was agreed in the $5,000 option is either returned or not, per contract.
You will have two contracts, one is the lease the other is the purchase contract with an addendum for lease purchase option.
If home values go up this is a win for the Buyer as they have locked in a lower purchase price. It’s not great for the seller because the seller has locked up their property and can’t rent or sell during the option period. Also if prices go up they are selling at a loss.
If prices go down a buyer may not want to exercise their option to buy and then may forfeit the option money.
The other part of the answer is financing. Some lenders will finance and some may not. If you do have a seller carry back it may be at a higher rate and I highly encourage you to have the documents drawn up by a professional skilled in that type of transaction.